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Bond Valuation and Analysis in R

Learn to use R to develop models to evaluate and analyze bonds as well as protect them from interest rate changes.

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4 Hours13 Videos43 Exercises11,453 Learners
3350 XP

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Course Description

After this course on quantitative finance with R, you will be able to use R to develop a model to value a fixed interest rate bond, estimate and analyze a bond's yield (i.e., a measure of the opportunity cost of bond investors), and model techniques used to protect bond portfolios from changes in interest rates.

Why value bonds?
Bonds are securities issued by governments or corporations that pay interest over a fixed schedule and are the most well-known type of fixed income securities. The US fixed income market is 1.5x larger than the US stock market, but, unlike stocks, most fixed income instruments, including bonds, trade very infrequently. Consequently, a bond's price may be a less reliable indicator of its value and analytical techniques are necessary when analyzing and valuing bonds.

  1. 1

    Introduction and Plain Vanilla Bond Valuation


    The fixed income market is large and filled with complex instruments. In this course, we focus on plain vanilla bonds to build solid fundamentals you will need to tackle more complex fixed income instruments. In this chapter, we demonstrate the mechanics of valuing bonds by focusing on an annual coupon, fixed rate, fixed maturity, and option-free bond.

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    50 xp
    Price vs. value
    50 xp
    Time value of money
    50 xp
    Computing a bond's future value
    100 xp
    Computing a bond's present value
    100 xp
    Bond valuation
    50 xp
    Laying out the bond's cash flows
    100 xp
    Discounting bond cash flows with a known yield
    100 xp
    Convert your code into a function
    50 xp
    Convert your code into a bond valuation function
    100 xp
  2. 2

    Yield to Maturity

    Estimating Yield To Maturity - The YTM measures the expected return to bond investors if they hold the bond until maturity. This number summarizes the compensation investors demand for the risk they are bearing by investing in a particular bond. We will discuss how one can estimate YTM of a bond.

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  3. 3

    Duration and Convexity

    Interest rate risk is the biggest risk that bond investors face. When interest rates rise, bond prices fall. Because of this, much attention is paid to how sensitive a particular bond's price is to changes in interest rates. In this chapter, we start the discussion with a simple measure of bond price volatility - the Price Value of a Basis Point. Then, we discuss duration and convexity, which are two common measures that are used to manage interest rate risk.

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  4. 4

    Comprehensive Example

    We will put all of the techniques that the student has learned from Chapters One through Three into one comprehensive example. The student will be asked to value a bond by using the yield on a comparable bond and estimate the bond's duration and convexity.

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In the following tracks

Applied FinanceQuantitative Analyst


Lore Dirick
Clifford Ang Headshot

Clifford Ang

Vice President at Compass Lexecon

Clifford S. Ang, CFA is a Vice President at Compass Lexecon. He specializes in valuation, corporate finance, and damages, and has worked on hundreds of engagements involving companies across a broad spectrum of industries. He is the author of Analyzing Financial Data and Implementing Financial Models Using R.
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